A Teaching Couple's Journey to Financial Independence

FAQ #2: What Do You Live on?

January 19, 2017

Poor Edwina Earns Only 7¢ a Month!

If you read FAQ #1, I already know what your next questions is. Here’s what’s going through your mind:

“Gee Ed, I think the way you funnel all of your paychecks into your various savings accounts is awesome, but what the heck do you live on? How do pay for rent, groceries, utilities, etc.? Do you and your family live in a cardboard box?”

Come on and admit it, I just read your mind, didn’t I? This question is a fair one because as you can imagine, we usually don’t have much money at the end of the month after stuffing our various accounts (see Edwina’s paycheck above). In 2016 from January to August, we received combined paychecks of 26¢: 7¢ for Edwina and 19¢ for me. Naturally, we need money to live on, so in order to work our financial plan, we set up two sources of income to cover our living expenses. (For the record, we don’t live in a cardboard box.)

I. 72t Distributions from IRAs

Before I proceed with this explanation, grab a cup of black coffee or go get some fresh air first because it can be BORING. A 72t distribution is an IRA distribution taken before age 59.5 that is NOT subject to the normal tax penalty of 10%. Such distributions must be part of a series of “substantially equal periodic payments” based upon the life expectancy of the individual. Essentially, a 72t distribution allows you to take IRA distributions before the age of 59.5 without penalty. Did you get that? In other words, you can tap your IRA before you’re old and gray. However, be aware that calculating your 72t distributions can be a bit confusing, so do your research or get some professional help to determine your distribution numbers. (Fun reading: #1, #2, #3, and #4)

In 2013, Edwina and I each had rollover IRAs at Vanguard with a combined balance of about $500,000. Since the money was trapped in IRA accounts, it just sat there waiting for us to retire. However, when we learned of our 72t distribution options, we realized that we could use some of our IRA money to cover current living expenses. After doing my research, I calculated our 72t distributions and set them up with Vanguard. My distribution was $10,404 and Edwina’s was $7,971 for a grand total of $18,375 a year. While that’s not a lot of money, $1,500 a month is enough to cover many of our living expenses. Because 72t distributions must be taken until the age of 59.5, we plan on taking out $18,375 until we turn age 60.

Woe is Me! My 19¢ Paycheck

II. 457 Distributions from “Old” Accounts

Those of you who read my “Crappy Jobs” posts (#1, #2) knew that this trusty account would be part of our income plan. We love 457 accounts for the following reason: as long as you have separated service from your employer (i.e. quit), 457 distributions are NOT subject to the normal 10% penalty for pre-59.5 withdrawals. Wow, do you understand what that means? Your formerly untouchable 457 “retirement”money can now be used as a current income stream without a tax penalty. What. A. Deal. (This is the reason that I advise teachers to fund their 457 accounts before their 403b accounts.)

We have four 457 accounts from our previous employers; these accounts have a combined balance of $90,000. Here’s how we’ll use our 457 funds this year. In 2017 we estimate that we’ll need $30,000 to cover our living expenses in Mexico and the U.S. Since we already have $18,375 from our 72t distributions, we plan on taking a 457 distribution of $12,000 later in the year. At a withdrawal rate of $12,000 a year, we should have enough money for seven years of distributions (until 2023). At the end of seven years, I’ll start receiving my Georgia TRS pension of about $24,000. Then, three years later Edwina will receive her pension of about $18,000.

Putting It All Together

Tough Times in Mexico: Eating Sushi and Empanadas at Chedraui Food Court in Merida

Suddenly, I feel a rumbling in my bowels…could it be last month’s chili that I had for breakfast? No, it’s everybody’s favorite: a table! Here’s what we plan to live on over the next seven years.

Income Sources for Our Living Expenses

* = This amount can vary. We currently have $90,000 in our 457 accounts.

72t Distributions

$18,375

457 Distributions*

$12,000

Total Income for Living Expenses

$30,375

While $30,000 isn’t big money, it’s enough for us to enjoy a decent and relaxed lifestyle. Here are a few final thoughts on our streams of income:

Our estimated income falls well within our 2017 free money + 10% amount of $43,500. This means our tax bill will be low.

Keep in mind that our $30,375 is much more than the same amount at your job. Why? Because your wages have not run through the taxman’s gauntlet yet. Mr. FICA, Uncle Federal, and Mrs. State all get a crack at your paycheck before you do (unless you feed your starving 457 and 403b accounts first…hint, hint). Sure, I have to pay taxes, but at a very low rate thanks to my tax planning. (Nota bene: We don’t pay FICA tax on our income because it’s derived from retirement distributions, not from wages.)

With the dollar-peso exchange rate at $1 U.S. = 22 Mexican pesos, $30,000 is a considerable amount of money in Mexico these days. I’m sure we could live very well on $2,500 a month in Cancun or Merida.

If we decide that we need more money, we can always take another “crappy” job and turn it into a golden-egg-laying goose. Like I said in FAQ #1, we can save at least $100,000 a year. If necessary, we could suck it up and teach for nine months. We’re not buttercups or cupcakes here!

I hope that answers your question about what we live on. If you have any questions, leave them in the comments section. Now, I’m going to tackle our next FAQ:

Investing: The majority (90%+) of our money is invested at Vanguard. If you know of a better low-cost option, please let me know.Why Vanguard?

Net Worth Tracking: We use Personal Capital to track our various accounts. Personal Capital is an great way to aggregate all of your financial accounts at one easy-to-use website.

Banking: We have used USAA for our checking and savings accounts since 1997. We also have checking and savings accounts at three credit unions: Alliant, Elements Financial, and Navy Federal. Finally, we have an online checking account with Simple.

Phone Options: My wife loves her $10 a month plan at Republic Wireless. I had the same plan and liked it too, but unfortunately I broke my phone in Mexico. I currently use a WiFi-enabled phone at a cost of $0 a month thanks to three Google apps: Voice, Hangouts, and Hangouts Dialer. We also have a Skype subscription with its own number for unlimited U.S. calls ($80 a year).

Travel Hacking: If you'd like to learn how to get "free" flights and hotel rooms, take the free course at Travel Miles 101. When we slow travel, we use Airbnb to find low-cost, month-long rentals. Whenever possible, we try to use Uber instead of taxis.

Steve,
Accessing our 457 money allowed us to ramp up our savings rate in the other pre-tax accounts. Instead of sitting in a fixed account earning 2%, that money provided a cash flow that helped us maximize savings for 3 years. While we were better than average savers, we had never saved that much before. Another consideration was that by quitting our jobs we could move our 403b money to Vanguard and lower our investment costs. I know the conventional wisdom is to never take money out of retirement accounts. However, because our distributions were from 457 plans, there was no 10% penalty. Plus, our money ($30k for 3 years) was used to cover basic living expenses, not increase our lifestyle.

Amazing articles…very eye opening! One question – if you want to live off your Roth IRA before age 59.5, can’t you just withdraw your contributions tax free? That seems easier to me than 72t distributions unless I’m missing something.

Coast2Coast,
Our 72t distributions provide us with over $18k a year for living expenses. Our Roth IRA balances were never high enough to provide that amount of income, so we opted for 72t distributions. If I could go back in time, I might consider doing a Roth IRA conversion ladder instead. Thanks for the question. Ed